ALP V THE COMMISSIONER OF INLAND REVENUE HC AK CIV-2010-404-2898

ALP V THE COMMISSIONER OF INLAND REVENUE HC AK CIV-2010-404-2898 5 July 2011IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2010-404-2898UNDER the Insolvency Act 2006IN THE MATTER OF the bankruptcy of KELVYN GLEN ALPBETWEEN KELVYN GLEN ALPApplicantAND THE COMMISSIONER OF INLANDREVENUERespondentHearing: 28 January 2011Counsel: S M Kilian for ApplicantC K Wood for RespondentJudgment: 5 July 2011 at 4:00 PMJUDGMENT OF ASSOCIATE JUDGE ABBOTTThis judgment was delivered byAssociate Judge Abbotton5 July 2011 at 4:00pmpursuant to Rule 11.5 of the High Court Rules..Registrar/Deputy RegistrarSolicitors:Duncan Cotterill, PO Box 5226 Auckland 1141, for ApplicantMeredith Connell, PO Box 2213 Auckland, 1140, for RespondentCase Manager:[1] This application to set aside a bankruptcy notice has its genesis in assessments of income tax payable by the applicant, Kelvin Glen Alp, made by the Commissioner of Inland Revenue in early 2008.[2] From the time that the Commissioner issued his assessments (which followed filing of tax returns by a tax agent for Mr Alp), Mr Alp has contended that the assessments were based on incorrect information in the original returns, and that the correct position is that he has no tax to pay (Mr Alp says that payments made to him, which have been assessed as income, were in fact capital payments and hence not taxable).[3] Mr Alp attempted to have the assessments amended, rather than follow the disputes procedures of the Tax Administration Act 1994 (the Act). As a consequence, the assessments are deemed to be correct by operation of s 109 of the Act. The Commissioner declined a request by Mr Alp under s 113 of the Act for amendment of the returns, on the basis that Mr Alp did not provide clear unambiguous evidence of an error.[4] The Commissioner obtained judgment in the District Court after the Court ruled that Mr Alp had no defence because of the deeming provisions in the Act. The Commissioner issued a bankruptcy notice based on the District Court judgment.[5] Mr Alp has applied to set aside that notice on the basis that he has a genuinely triable dispute as to his liability, and that the steps that the Commissioner has taken, leading to the judgment underlying the bankruptcy notice, were in breach of his statutory duty to act fairly and impartially. He contends that, in the circumstances, issue of the bankruptcy notice is an abuse of process. Alternatively, he asks that the notice be set aside so that he can seek judicial review of theCommissioner's decision not to amend the returns.[6] The Commissioner denies that he has failed to act fairly and impartially towards Mr Alp. He says that Mr Alp has been the author of his own misfortune, and that there is nothing unfair in allowing the bankruptcy notice to stand.Relevant history[7] Mr Alp filed tax returns in January 2008 through a tax agent. At a subsequent date (not in evidence), the Commissioner issued assessments in relation to those returns.[8] On 23 April 2008 Mr Alp wrote to the Commissioner seeking to amend the returns filed by his tax agent, on the grounds that the earlier returns were incorrect.[9] An investigating officer, acting on behalf of the Commissioner, wrote back to Mr Alp on 23 May 2008, informing him that the Commissioner was accepting MrAlp's letter as a notice of proposed adjustment under ss 89D and 89F of the Tax Administration Act 1994 (part of the disputes procedures set up in Part IVA of the Act). The officer informed Mr Alp that he would decide whether to accept the adjustment put forward in the amended returns, or to issue a Notice of Response as part of the disputes process. The letter asked Mr Alp to provide working papers,both for the tax agent's original return and for the revised return.[10] On 17 June 2008, the investigating officer wrote to Mr Alp enclosing a Notice of Response by the Commissioner, pending Mr Alp providing satisfactory information to support his position and stating that this was under the disputes procedures in Part IVA of the Act. The investigating officer advised Mr Alp that ifhe rejected the Commissioner's Notice, he had to notify Inland Revenue of this within two months of the date of the notice. The investigating officer asked Mr Alpto provide information identified within the Commissioner's Notice so that he could ―endeavour to have your adjusted returns accepted.[11] On 25 June 2008, Mr Alp responded to the investigating officer's letter of17 June 2008. The relevant portions of Mr Alp's letter read:I believe that the Commissioner of Inland Revenue may have misinterpreted the intent of my previous letter. My letter was not a ‗Notice of Proposed Adjustment' atall, but rather amended my information so the Commissioner can correct his records accordingly as per Section 113 of the Tax Administration Act 1994.Please note that I am not disputing the Commissioners assessment, I am simply ensuring that the Commissioners assessment is based on the correct information.As all of the information as to any alleged tax liability pertaining to this matter originates with me, it is only I that am qualified to present the facts as they are, to the best of my knowledge and belief.Believing at that time, that he knew what he was doing, my ‗Tax Agent' (MrMcCready), was supplied with information by me, that he did not apply in the correct manner and nor did he file the correct forms when he made his submission. I then found that a mistake had been made and hence, I corrected that information when such became apparent to me and then provided that information accordingly.[12] The investigating officer replied on 22 July 2008. Relevant parts of that letter read:In that letter you stated ―My letter was not a ―Notice of Proposed Adjustment at all, but rather amended my information so theCommissioner can correct his records accordingly as per Section 113 of theTax Administration Act 1994 (―the TAA).As requested the Commissioner agrees to withdraw his Notice of Response, set aside the disputes process that had been entered into, and will now consider your amended returns under section 113 of the TAA.Section 113 of the TAA provides that:113(1) Subject to section 89N, the Commissioner may from time to time, and at anytime, amend an assessment as the Commissioner thinks necessary in order to ensure its correctness, notwithstanding that tax already assessed may have been paid.....Your ObligationsI understand your position to be that your tax agent Mr Graham McCready(―Mr McCready) made errors when he completed your returns.In order to decide whether to exercise his discretion under section 113 of the TAA the Commissioner needs to understand how both the original returns were calculated, and also how the amended returns have been calculated.You are required to provide the following supporting information in full:Self employment incomeOn 3 January 2008 your then agent Mr McCready filed tax returns for a number of years showing self employment income as a Human Relations Consultant.This is shown below in the returns as Income after expenses (net).....We understand these figures were compiled from information personally supplied by you to Mr McCready. Inland Revenue needs to know what the actual income and expenses were for each income year in order to understand how these figures were calculated.Please supply copies of the accounts, general ledgers, bank statements and all other documents and working papers used to calculate the above figures for the income years ended 31 March 2001-2007.PAYEOn 12 January 2008 Mr McCready contacted us to amend your income for the 2004 and 2005 tax years. He told us that previously disclosed self employment earnings in those years were in fact salary and wages. He said this income was from employment with the Sunmax Perfection International Group, PAYE having been deducted at source. Summary of Earnings for each of those income years were issued 14 January 2008 from the information supplied by Mr McCready;...Inland Revenue has no record of these PAYE deductions. Please supply documentary evidence such as wage slips or copy of employment contract to evidence or explain why Mr McCready made this change.On 23 April 2008 having dispensed with Mr McCready's services, yousubmitted amended returns. Identical returns were also submitted on your behalf by Leanne Martinovich on 27 May 2008. The returns provide the following information:...You had already been asked to provide copies of all documents used to compile the original returns by Mr McCready.Plead provide evidence which demonstrates why the original amounts calculated by Mr McCready are incorrect, and why they [sic] those amounts should not be considered as taxable income.SecrecyIn your letter of 3 June 2008 you state that during the income years ended 31 March 2001-2007 that you received a number of loans from family, friends and associates. You also state that these creditors do not wish their identities to be disclosed to a third party.Inland Revenue takes it's [sic] responsibilities in regard to the secrecy of taxpayer information extremely seriously. Section 81 of the TAA outlines the rare circumstances when disclosure of such information would be considered.As outlined above, to allow the Commissioner to ascertain clearly and unambiguously that a genuine error has occurred in regard to the loans please provide:i. The identities of each of the loan providers;ii. Details of each loan, including the amounts attributable to each creditor;iii. The amount of each loan identified against the original figures used by Mr McCready in the original returns;iv. All supporting documentation for these loans; andv. Bank Account statements clearly identifying the deposit of each loan into your bank account.SummaryThe SPS sets out the Inland Revenue policy in regard to requests pursuant to section 113 of the TAA. The SPS sets out that you must provide clear and unambiguous evidence such that the Commissioner can be certain that an error has been made. Please provide the necessary evidence as requested above which the Commissioner considers is required to assess whether a mistake has been made in your case. ....[13] Inland Revenue's Standard Practice Statement in respect of requests to amendassessments (referred to as the SPS) was enclosed with the investigating officer'sletter of 22 July 2008. The statement referred to s 113 operating alongside but not being part of the dispute resolution process, and advised that the Commissioner would not amend assessments while any aspect of the assessments was the subject of a current dispute under Part IVA, but that assessments could be amended consequentially following completion of the process, or to reflect agreed adjustments. The statement said that the Commissioner had a discretion to correct genuine errors, and that it was the obligation of the taxpayer to provide facts and law which established clearly and unambiguously that there were genuine errors.[14] On 21 August 2008, Mr Alp responded with a letter setting out argument as to his position and confirmed his earlier statement that he had not entered into the disputes process, but rather was seeking to correct information that had been filed. He also said that the Commissioner's insistence that he disclose information about persons who had provided him loans ―places me in a quandary and asked theCommissioner to assist him to allay his concerns by directing him to the appropriate section of the Tax Act which overrode the Privacy Act (notwithstanding that the investigating officer had covered this in his letter of 22 July 2008).[15] Mr Alp must have re-thought his position because he wrote again to the Commissioner, on 5 September 2008, producing annotated bank statements which he tendered as proof of the loans. He stated:Further to my latter [sic] of 21 August 2008, I have gone to the trouble and expense ($350.00) to obtain my personal bank statements for the periods covering 24 December 2000-24 January 2007.You will note I have highlighted, to the best of my knowledge and belief, the relevant deposits that may be of interest to you, where they have originated and for what purposes they were made. References to 'TRAXX Development loans' are due to contributors loaning funds in order for me to focus on what I had hoped would be a very good invention (Design proof and prototypes, available upon request). I am yet to bring that project to fruition and repay those loans out of any future success.I hope that this will serve as proof of what I have stated to you in my previous correspondence in relation to loans I have received. Some of these loans are clearly marked as such by the contributors, while others have been identified by me as being such.As you would be aware, no one likes to have their character called into question and basically called a liar just because he identifies a mistake and seeks to correct that mistake. I am no exception.Please cause to have amended the records as submitted and filed by me personally, in place of the mistaken information filed by Mr McCready.[16] It appears that nothing further happened until the Commissioner wrote (nearly a year later), on 28 August 2009, advising:I refer to our previous correspondence regarding your request that the Commissioner amend your above income tax returns under section 113 ofthe Tax Administration Act 1994 (―TAA).Section 113 of the TAA provides that:113(1) Subject to section 89N, the Commissioner may from time to time, and at any time, amend an assessment as the Commissioner thinks necessary in order to ensure its correctness, notwithstanding that tax already assessed may have been paid.After consideration it has been decided that you have failed to provide sufficient evidence to prove that the Commissioner has made a clear and unambiguous error in his assessments of your tax liability in the relevant tax years, and therefore the Commissioner will not exercise his discretion to make an amendment under section 113 of the TAA.Please note that this is not a disputable decision. If you wish to take the matter further you may be able to bring proceedings for judicial review. Your current tax debt remains due and payable, and I will write to you under separate cover in regards to this.[17] The Commissioner issued proceedings in the District Court on 16 October 2009, seeking judgment for the amount of the debt as assessed in April 2008. Mr Alp (in person) filed a statement of defence on 1 December 2009. On 5 December 2009, a District Court Judge issued a minute declining to accept the statement of defence and giving Mr Alp time to file one that disclosed a defence. On 18 December 2009, Mr Alp filed a second statement of defence which did not go any further substantively than his first one. On 20 January 2010, the Court issued a further minute rejecting the second statement of defence and indicated to the Commissioner that it was open to the Commissioner to seek judgment. The Commissioner did so, three days before Mr Alp filed an application to strike out theCommissioner's claim. That application was returned to Mr Alp on the basis thatjudgment had been entered on 2 February 2010.[18] The present bankruptcy notice was issued on 13 May 2010.Grounds in support of, and opposition to, application[19] A person seeking to set aside a bankruptcy notice requiring payment of a judgment debt must show that he or she has a genuine, triable counterclaim, set-off or cross-demand that could not be used as a defence in the action in which judgment was given.1[20] In his application and affidavits in support, Mr Alp contends that he has avalid ground of defence to the Commissioner's claim (namely that the assessmentswere made in respect of capital receipts which would not have been treated as income) but could not set that up in the District Court proceeding because the Commissioner had failed to advise him properly as to his rights under the disputes procedures of the Act and the potential loss of those rights by reason of his decision to pursue amendment under s 113. He says that if the Court does not accept that he1 Clark v UDC Finance Ltd [1985] 2 NZLR 636 (HC); Sharma v ANZ Banking Group (NZ) Ltd(1992) 6 PRNZ 386 (CA) at 389.still has a triable counterclaim, the Court should exercise its inherent jurisdiction to set the notice aside on the grounds that the issue of the notice is an abuse of process.2Alternatively, he says that the bankruptcy notice should be set aside to allow himopportunity to pursue an application for judicial review of the Commissioner'sdecision not to amend his assessments.[21] The Commissioner contends that Mr Alp does not have any rights of counterclaim, set-off or cross-demand. He says that he discharged his obligations bytreating Mr Alp's filing of returns as invoking the disputes procedures, but had noobligation to inform Mr Alp of the consequences of his decision not to pursue that process but rather seek amendment of the returns under s 113 of the Act. He also contends that he made it clear to Mr Alp the information that was needed to support an application under s 113, and was entitled to reject that application when Mr Alp failed to provide evidence of a clear error. He says that there is no purpose to giving Mr Alp further time for a judicial review as there are only limited grounds on which a review can be brought and Mr Alp will not qualify.[22] Mr Alp's contention that he still has a triable counterclaim can be disposed of quickly, on the basis that any claim is statute-barred. The essential issue arising out of the opposing contentions is whether it was an abuse of process for the Commissioner to rely on the deeming provisions in the Act in light of the background circumstances. It will also be necessary to consider whether the Court should set aside the notice to give Mr Alp opportunity to pursue an application for judicial review.Is there a genuinely triable counterclaim or set-off?[23] The bankruptcy notice is based on a judgment for tax, penalties and late payment interest. Counsel for Mr Alp has presented his case on the basis that he has a defence to that judgment which he could not set up in the District Court, because of the deeming effect of s 109 of the Act:[109] Disputable decisions deemed correct except in proceedings2 Re Hawkens, ex parte Official Assignee HC Auckland CIV-2008-404-6712, 16 March 2009 at [16].Except in objection proceedings under Part 8 or a challenge under Part 8A, —(a) No disputable decision may be disputed in a court or in any proceedings on any ground whatsoever; and(b) Every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.[24] Leaving aside, for the moment, Mr Alp's contention that he has a validdefence outside of the disputes procedures (which does not seem tenable having regard to the terms of s 109), this ground for setting aside cannot succeed having regard to r 5.61(1) and (2) of the High Court Rules:5.61 Restriction when the Crown involved(1) In a proceeding by the Crown for the recovery of taxes, duties, or penalties, a defendant is not entitled to advance any set-off or counterclaim.(2) In a proceeding of any nature by the Crown, a defendant is not entitled to advance any set-off or counterclaim arising out of a right or claim to payment in respect of any taxes, duties, or penalties.[25] Given the fact of the judgment, and that Mr Alp has neither applied to have itset aside nor sought special leave to appeal out of time, the Commissioner'sentitlement to issue the bankruptcy notice is unquestionable, and Mr Alp'sapplication to set it aside on the grounds of a triable counterclaim is barred by r 5.61.This takes me to Mr Alp's second point, that the Commissioner is only in thisposition by reason of his failure to carry out statutory duties, giving rise to an abuse of process.Has there been an abuse of process?[26] Counsel for Mr Alp submitted that the Commissioner obtained the judgment against Mr Alp through a misunderstanding by Mr Alp of the statutory procedures available to him to dispute the Commissioner's assessment. He argued that theCommissioner knew that Mr Alp was claiming an error had occurred, and had to beconscious of the possibility of that error given that the original returns had been filed by a tax agent who was known for filing incorrect returns (and had been prosecuted for it). In those circumstances, counsel argued that the Commissioner had a duty to ensure that Mr Alp was fully aware of the available procedures for addressing an error, and the potential consequences of the approach he took. Counsel submitted that in that context:(a) it should have been apparent to the Commissioner, on receiving Mr Alp's letter of 25 June 2008 telling the Commissioner that he wasnot invoking the disputes process but was seeking an amendment of the returns under s 113 of the Act, that Mr Alp was disputing the assessment but misunderstood the application of s 113;(b) Mr Alp was not going to be able to establish the genuine error that was needed to give the Commissioner power to amend;(c) the integrity of the tax system required the Commissioner to take stepsto ensure that Mr Alp's liability was determined ―fairly, impartially and according to law,3 and he had a wider obligation to promote compliance with the Inland Revenue Acts;4(d) a proper discharge of the Commissioner's duties under s 6 and 6A ofthe Act (to protect the integrity of the tax system) required him to ensure that Mr Alp (a lay person acting for himself) was aware of the alternative processes and the consequences of pursuing amendment under s 113 rather than carrying on the disputes procedure;(e) there was no reason why the disputes procedure could not have run alongside the request for amendment under s 113 (particularly in light of the fact that Mr Alp had not requested withdrawal of theCommissioner's notice of response); and3 Tax Administration Act 1994, ss 6(2)(b) and (f) .4 Section 6A(3)(b).(f) the Commissioner's decision to terminate the disputes procedure, andhis failure to inform Mr Alp that he was entitled to challenge that decision, was a breach of duty, such that it would be an abuse of process to allow him to enforce a judgment which was obtained by that breach of duty.[27] Mr Alp's case hinges on the extent of the Commissioner's obligations to inform taxpayers as to their rights. The Commissioner's general obligations under ss6 and 6A of the Act have to be considered in light of the specific obligations placed on taxpayers:(a) to furnish a return of income containing an assessment of tax payable;5 and(b) to keep all necessary books and records and co-operate with the Commission in a way that assists the exercise of the Commissioner'spowers;6 and(c) to furnish required information, including supporting documents, with returns,7 which includes amended returns.[28] The case advanced for Mr Alp is tantamount to saying that the Commissioner has an advisory role in respect of taxpayers. I consider that takes theCommissioner's obligations to inform too far. It is sufficient that he ensure that thetaxpayer is made aware generally of rights (such as the disputes procedures) and that information about those procedures is available, and is provided on request. The Commissioner meets the general obligations by provision of information on a website and in information brochures. I consider that he met his obligations in the present case by the investigating officer:(a) referring Mr Alp to the disputes procedures of the Tax Administration Act (in his letter of 23 May 2008);5 Tax Administration Act 1994, s 33.6 Sections 15(b), (d) and (f).7 Section 40.(b) alerting Mr Alp to the time-frame for the next step in the disputeprocedures, and providing details on the back of the Commissioner'sNotice of Response (in the letter of 17 June 2008); and(c) providing the Standard Practice Statement as to requests for amendment of returns (in his letter of 22 July 2008).[29] Counsel for Mr Alp submitted that the Commissioner should have told Mr Alp that the two processes could have run together, and warned him that he would lose his rights in respect of the disputes procedures by pursuing the power of amendment under s 113 alone. I am not persuaded that there is any merit to this point. The Commissioner pointed Mr Alp to the disputes procedures by accepting his amended returns as a Notice of Proposed Adjustment for the purpose of invoking the disputes procedures. The investigating officer kept both paths open in his letterof 17 June 2008, and drew Mr Alp's attention to what was required under each (in the reference to the time-frame for steps, and the detail of the steps to be taken under the disputes procedures on the rear of the Notice of Response, and the further information required from Mr Alp in respect of the s 113 application).[30] It is unrealistic, in my view, for Mr Alp to suggest that the Commissioner should have questioned the unequivocal statements in Mr Alp's letter of 25 June2008 that he was not invoking the disputes procedures, but pursuing the application under s 113. Indeed, the explicit reference to the Commissioner correcting his records under s 113 demonstrated that Mr Alp had some knowledge of the Act. Inthe circumstances, the Commissioner's response (agreeing to withdraw his Notice ofResponse, his commitment to undertake a review under s 113, and his detailed request for information required to enable a proper review) was an understandable and reasonable next step.[31] I accept the submission of counsel for the Commissioner that Mr Alp, unfortunately, has been the author of his own misfortune both in respect of the decision he took not to pursue the disputes procedures (which appears to have been taken without other advice) and his decision not to respond more fulsomely to theCommissioner's request for information to support the application for amendment.In the latter respect, it is appropriate to note that the Commissioner has his own statutory imperatives with respect to applications for amendment – he must be satisfied that there has been a genuine error, in order to invoke his powers of amendment. It was for Mr Alp to provide information to satisfy the Commissioner.[32] Counsel for Mr Alp argued that the Commissioner had not complied with his own practice (as set out in para 35 of the Standard Practice Statement) to request additional information to that provided by Mr Alp on 5 September 2008. I accept that this is something that the Commissioner could have done (at least to alert Mr Alp to the fact that the annotated bank statements did not meet the detailed requestfor information set out in the investigating officer's letter of 22 July 2008. However, I consider that that falls a long way short of impugning the Commissioner's actionsto the extent of finding an abuse of process. There are two relevant matters to weigh in that respect:(a) The Commissioner had already accepted Mr Alp's statement that hewas not pursuing the disputes procedures (and the information statement was explicit (para 11) that the s 113 process was separate from the disputes procedures).(b) Notwithstanding various indications from Mr Alp, he has neither sought to provide further information since, nor taken any other steps despite indicating they were being contemplated (most notably the suggestion of an application for judicial review of the s 113 decision). The Courts have said that the imposition of time limits is an essential feature of tax administration, and the absence of timely objection in general should be determinative of liability.8 It may still be open to Mr Alp to persuade the Commissioner that there is a basis for a further s 113 review, but clearly to succeed in that he needs to provide the detail of information that, to date, he has chosen not to do. For example, he needs to show what error the tax agent made.8 Commissioner of Inland Revenue v Wilson (1996) 17 NZTC 12,512 (CA) at 12,520.[33] As just mentioned, Mr Alp has also indicated, but done nothing about, a possible application for judicial review. There are serious questions as to whether or not there is any possibility of a successful review on the basis of the information put forward by Mr Alp to date, but an adverse decision on this application does not prevent that application. There would be time to make it before any further process in bankruptcy, and that could potentially form the basis for deferral of that process whilst that matter is being pursued. However, these are not factors which justify a setting aside of the bankruptcy notice.Decision[34] The application to set aside is dismissed.[35] As the successful party, the Commissioner is entitled to costs on a 2B basis, together with disbursements as fixed by the Registrar.____________________Associate Judge Abbott